Xponential Fitness(XPOF) - 2023 Q2 - Quarterly Report

FORM 10-Q Cover Page Filing Information The company files its Q2 2023 quarterly report as an accelerated filer and emerging growth company - This is the Quarterly Report on Form 10-Q for Xponential Fitness, Inc, for the period ended June 30, 2023[2] - The company is classified as an 'accelerated filer' and an 'emerging growth company'[3] Outstanding Shares (as of July 31, 2023) | Class of Stock | Shares Outstanding | | :--------------- | :----------------- | | Class A Common | 33,455,003 | | Class B Common | 16,510,913 | Table of Contents Table of Contents Overview The report is structured into two parts covering financial information and other corporate disclosures - The report is structured into two main parts: Part I (Financial Information) and Part II (Other Information)[6] - Part I includes Financial Statements, Management's Discussion and Analysis, Market Risk, and Controls and Procedures[6] - Part II covers Legal Proceedings, Risk Factors, Unregistered Sales of Equity Securities, and other disclosures[6] PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and accompanying notes Condensed Consolidated Balance Sheets Total assets and liabilities increased, driven by growth in right-of-use assets and long-term debt Key Financial Position Metrics | Metric (in millions) | June 30, 2023 | December 31, 2022 | | :------------------- | :------------ | :---------------- | | Total assets | $545.1 | $482.7 | | Total liabilities | $567.9 | $382.7 | | Total stockholders' deficit | $(204.5) | $(208.1) | - Significant increases in Right-of-use assets ($85.6 million from $30.1 million) and Long-term debt ($257.5 million from $133.0 million) contributed to asset and liability growth[9] - Redeemable convertible preferred stock decreased to $181.7 million from $308.1 million[9] Condensed Consolidated Statements of Operations Revenue grew for both three and six-month periods, but net income declined due to higher operating costs and interest expense Statement of Operations Summary | Metric (in millions) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total revenue, net | $77.3 | $59.6 | $148.0 | $109.9 | | Operating income | $36.5 | $36.1 | $29.2 | $21.4 | | Net income | $27.5 | $31.5 | $12.5 | $16.3 | | Net income per share (Diluted) | $0.09 | $0.50 | $0.08 | $0.26 | - Interest expense significantly increased, rising from $2.9 million to $8.6 million for the three months and from $5.7 million to $16.6 million for the six months[12] - Acquisition and transaction income, a non-cash item, remained substantial at $(31.3) million for the three months and $(15.5) million for the six months[12] Condensed Consolidated Statements of Changes to Stockholder's Equity (Deficit) Key equity movements include net income, equity-based compensation, and a significant adjustment from the repurchase of preferred stock - Net income attributable to Xponential Fitness, Inc for the three months ended June 30, 2023, was $18.4 million, and for the six months, it was $8.4 million[15] - Equity-based compensation for the six months ended June 30, 2023, was $11.2 million[15] - The company repurchased preferred stock, leading to a deemed contribution from redemption of convertible preferred stock of $12.7 million for the six months ended June 30, 2023[15] Condensed Consolidated Statements of Cash Flows Operating cash flow increased, while financing cash outflow grew due to preferred stock redemption and tax payments Cash Flow Summary | Cash Flow Activity (in millions) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $30.6 | $26.2 | | Net cash used in investing activities | $(5.6) | $(5.6) | | Net cash used in financing activities | $(22.1) | $(12.6) | | Increase in cash, cash equivalents and restricted cash | $2.8 | $7.9 | - Key financing activities in 2023 included $126.1 million in borrowings from long-term debt, $130.8 million in payments for redemption of preferred stock, and $8.1 million in tax payments related to restricted share units[21] Supplemental Cash Flow Information | Metric (in millions) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------- | :----------------------------- | :----------------------------- | | Interest paid | $15.0 | $5.0 | | Income taxes paid | $1.1 | $2.0 | Notes to Condensed Consolidated Financial Statements These notes provide detailed disclosures on accounting policies, acquisitions, debt, leases, and other financial statement components Note 1 – Nature of Business and Operations Xponential Fitness is a holding company that franchises ten boutique fitness brands and manages a growing number of transition studios - Xponential Fitness, Inc is a holding company that franchises ten boutique fitness brands, including Club Pilates, CycleBar, and StretchLab[28] - As of June 30, 2023, the Company operated 84 company-owned transition studios, compared to 14 in 2022[28] - The Company consolidates the financial results of XPO LLC and XPO Holdings, allocating a portion of net income/loss to noncontrolling interests[29][30] Note 2 – Summary of Significant Accounting Policies This note details accounting policies for its single reportable segment, fair value, and earnings per share, with no material impact from new standards - The Company operates in one reportable segment, with international revenue of $7.0 million for the six months ended June 30, 2023[34] - Restricted cash, primarily for marketing funds and a letter of credit, totaled $7.1 million at June 30, 2023[37] - The adoption of new accounting standards for credit losses and business combinations did not have a material impact on the financial statements[39][54][56] Allowance for Credit Losses Activity (in thousands) | Activity | Accounts Receivable | Notes Receivable | Total | | :--------------------------------- | :------------------ | :--------------- | :----- | | Balance at January 1, 2023 | $865 | $719 | $1,584 | | Bad debt expense recognized | $716 | $181 | $897 | | Write-off of uncollectible amounts | $(459) | — | $(459) | | Balance at June 30, 2023 | $1,122 | $900 | $2,022 | Note 3 – Acquisitions and Dispositions The company acquired 14 Rumble studios, resulting in goodwill and an intangible asset write-down, and refranchised 34 transition studios - On June 5, 2023, the Company acquired 14 Rumble studios from the original founder sellers, which will operate as company-owned transition studios[59] - The acquisition resulted in $4.9 million in goodwill and a $7.2 million write-down of intangible assets related to franchise agreements[60][62] - During the six months ended June 30, 2023, the Company refranchised 34 company-owned transition studios, compared to 15 in the prior year[65] Preliminary Estimated Fair Values (in thousands) | Item | Amount | | :--------------------------------- | :----- | | Accounts receivable | $154 | | Inventories | $98 | | Property and equipment | $1,113 | | Right-of-use assets | $42,016| | Goodwill | $4,866 | | Deferred revenue | $(4,002)| | Lease liabilities | $(44,244)| | Reduction to receivable from shareholder | $1 | Note 4 – Contract Liabilities and Costs from Contracts with Customers Contract liabilities, mainly deferred franchise fees, increased to $147.4 million, while deferred contract costs totaled $48.2 million Contract Liabilities | Type (in millions) | June 30, 2023 | December 31, 2022 | | :------------------- | :------------ | :---------------- | | Franchise and area development fees | $121.4 | $116.2 | | Brand fees | $5.2 | $6.6 | | Equipment and other | $20.8 | $18.6 | | Total deferred revenue | $147.4 | $141.5 | | Non-current portion | $112.8 | $109.5 | | Current portion | $34.6 | $32.0 | Estimated Future Revenue Recognition (in millions) | Period | Franchise Development Fees | Brand Fees | Total | | :---------------- | :------------------------- | :--------- | :----- | | Remainder of 2023 | $4.0 | $2.5 | $6.5 | | 2024 | $8.4 | $1.8 | $10.2 | | 2025 | $9.0 | $0.4 | $9.4 | | 2026 | $10.2 | $0.4 | $10.6 | | 2027 | $10.5 | — | $10.5 | | Thereafter | $79.4 | — | $79.4 | | Total | $121.4 | $5.2 | $126.6 | - Deferred contract costs (commissions) were approximately $48.2 million at June 30, 2023 ($3.8 million current, $44.4 million non-current)[72] Note 5 – Notes Receivable The company provides financing to franchisees, with the total principal balance of notes receivable decreasing to $3.0 million - Notes receivable from franchisees are for equipment purchases, franchise fees, or establishment of new studios[73][74] - The principal balance of notes receivable decreased from $3.3 million at December 31, 2022, to $3.0 million at June 30, 2023[75] - The company evaluates collectability and establishes an allowance for doubtful accounts based on franchisee ability to pay and economic conditions[75] Note 6 – Property and Equipment Net property and equipment increased to $21.2 million, driven by investments in software and leasehold improvements Property and Equipment Summary | Type (in millions) | June 30, 2023 | December 31, 2022 | | :------------------- | :------------ | :---------------- | | Furniture and equipment | $4.4 | $4.2 | | Computers and software | $17.9 | $14.1 | | Vehicles | $0.6 | $0.2 | | Leasehold improvements | $9.1 | $7.5 | | Construction in progress | $2.1 | $3.1 | | Less: accumulated depreciation | $(12.9) | $(10.6) | | Total property and equipment | $21.2 | $18.5 | - Depreciation expense for the six months ended June 30, 2023, was $2.6 million, an increase from $1.7 million in the same period of 2022[76] Note 7 – Goodwill and Intangible Assets Goodwill increased due to an acquisition, while net intangible assets decreased from a write-down and ongoing amortization - Goodwill increased by $4.9 million to $170.6 million at June 30, 2023, primarily from the acquisition of 14 Rumble studios[77] Intangible Assets Summary | Type (in millions) | June 30, 2023 Net Amount | December 31, 2022 Net Amount | | :----------------- | :----------------------- | :--------------------------- | | Trademarks (definite-lived) | $17.4 | $18.5 | | Franchise agreements | $31.4 | $44.0 | | Reacquired franchise rights | $1.4 | — | | Web design and domain | $0.2 | $0.2 | | Deferred video production costs | $2.0 | $1.9 | | Total definite-lived | $52.5 | $64.6 | | Trademarks (indefinite-lived) | $72.6 | $72.6 | | Total intangible assets | $125.1 | $137.2 | - A $7.2 million write-down of franchise agreements was recorded in connection with the Rumble studios acquisition[78] - Amortization expense for the six months ended June 30, 2023, was $5.8 million[78] Note 8 – Debt The company's long-term debt increased to $265.9 million with an interest rate of 11.74%, and it remains in compliance with all covenants - The company's debt includes a senior secured term loan facility with several incremental term loans added in 2021, 2022, and 2023[80][86][87][88] - The interest rate on borrowings was 11.74% at June 30, 2023[81] - The company was in compliance with all customary affirmative and negative debt covenants as of June 30, 2023[84] Principal Payments on Long-Term Debt (in millions) | Period | Amount | | :---------------- | :----- | | Remainder of 2023 | $2.1 | | 2024 | $4.3 | | 2025 | $259.5 | | Total | $265.9 | Note 9 – Leases Operating lease right-of-use assets and liabilities increased significantly, with total lease expense rising to $6.1 million for the period Lease Information | Metric (in millions) | June 30, 2023 | December 31, 2022 | | :--------------------- | :------------ | :---------------- | | ROU assets, net | $85.6 | $30.1 | | Lease liabilities, short-term | $14.7 | $3.8 | | Lease liabilities, long-term | $77.6 | $30.6 | - Total lease expense for the six months ended June 30, 2023, was $6.1 million, compared to $2.3 million in the prior year[96] - Lease liabilities arising from new ROU assets for the six months ended June 30, 2023, were $62.2 million[96] Maturities of Lease Liabilities (in millions) | Period | Amount | | :-------------------------- | :----- | | Remainder of 2023 | $14.1 | | 2024 | $17.2 | | 2025 | $17.9 | | 2026 | $18.1 | | 2027 | $17.4 | | Thereafter | $40.1 | | Total future lease payments | $124.9 | | Less: imputed interest | $32.6 | | Total | $92.3 | Note 10 – Related Party Transactions Transactions include a receivable from a shareholder, revenue from officer-owned franchises, and an investment involving a board member - The company has a receivable from a shareholder (Rumble Seller) which increased by $4.4 million for the six months ended June 30, 2023[100] - Spartan Fitness, which owns 66 Club Pilates studios, received an investment from a special purpose vehicle controlled by a company board member[103] - Revenue from affiliates (franchisees who are officers) was $0.3 million for the six months ended June 30, 2023, down from $1.3 million[104] Note 11 – Redeemable Convertible Preferred Stock The company repurchased $130.8 million of its convertible preferred stock, resulting in a $12.7 million deemed contribution - The Convertible Preferred Stock has a 6.50% quarterly cash coupon or a 7.50% Paid-in-Kind (PIK) rate[105] - On January 9, 2023, the company repurchased 85 shares of Convertible Preferred Stock for $130.8 million, resulting in a $12.7 million deemed contribution[110] - The preferred stock is recorded at its maximum redemption value, which was $181.7 million at June 30, 2023, down from $308.1 million[111] Note 12 – Stockholder's Equity (Deficit) Equity changes were driven by a secondary public offering and exchanges of LLC units for Class A common stock - In February 2023, selling stockholders sold 5,750 shares of Class A common stock in a secondary public offering[112] - Continuing Pre-IPO LLC Members exchanged 1,593 LLC units for Class A common stock during the six months ended June 30, 2023[112] XPO LLC Ownership (as of June 30, 2023) | Owner | Units Owned | Percentage | | :----------------------- | :---------- | :--------- | | XPO Inc | 33,220 | 67 % | | Noncontrolling interests | 16,592 | 33 % | | Total | 49,812 | 100 % | Note 13 – Equity Compensation Total RSU compensation expense increased to $11.2 million for the period, with $26.4 million remaining to be recognized - Profit interest units, converted to Class B shares post-IPO, resulted in $17 thousand of expense for the six months ended June 30, 2023[118] - Liability-classified RSUs, tied to EBITDA targets, generated $0.9 million in expense for the six months ended June 30, 2023[119] - Total compensation expense for equity-classified RSUs was $11.2 million for the six months ended June 30, 2023, with $26.4 million of unamortized expense remaining[124][125] RSU Activity (Six Months Ended June 30, 2023) | Activity | Shares | Weighted Average Grant Date Fair Value per Share | | :------------------------------- | :----- | :--------------------------------------------- | | Outstanding at December 31, 2022 | 2,102 | $18.25 | | Issued | 321 | $25.04 | | Vested | (767) | $27.42 | | Forfeited, expired, or canceled | (22) | $20.00 | | Outstanding at June 30, 2023 | 1,634 | $19.48 | Note 14 – Income Taxes and Tax Receivable Agreement The company maintains a full valuation allowance against deferred tax assets, resulting in a near-zero effective tax rate - The company is taxed as a corporation on its 67% economic interest in XPO Holdings[126] - The effective tax rate for the six months ended June 30, 2023, was 0.1%[127] - A full valuation allowance has been established against deferred tax assets as of June 30, 2023, due to uncertainty of realization[128] - The company has not recorded $79.3 million of the TRA liability as of June 30, 2023, due to uncertainty regarding the realization of related deferred tax assets[134] Note 15 – Earnings Per Share Basic and diluted EPS were lower than the prior year, partly due to the anti-dilutive effects of certain securities - The company applies the two-class method to allocate undistributed earnings or losses for EPS calculation[136] - Potentially dilutive effects of Class B common stock and convertible preferred shares were anti-dilutive for certain periods in 2023[139] EPS Summary | EPS Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Basic EPS | $1.44 | $3.28 | $0.16 | $1.86 | | Diluted EPS| $0.09 | $0.50 | $0.08 | $0.26 | Note 16 – Contingencies and Litigation Legal claims related to the BFT acquisition were favorably resolved, and contingent consideration from acquisitions decreased - Legal claims related to the BFT acquisition, including patent and trademark infringements, were favorably resolved in April 2023[141] - Contingent consideration from acquisitions decreased by $15.2 million for the six months ended June 30, 2023, to $12.5 million[144] - The company guarantees lease agreements for certain franchisees, with a maximum obligation of $3.3 million as of June 30, 2023[149] - An accrual of $0.2 million has been recorded for a potential obligation under a standby letter of credit for franchisee loans[148] Note 17 – Subsequent Events Subsequent to the quarter, the board approved a $50 million share repurchase program funded by an additional $65 million in term loans - On August 1, 2023, the board approved a $50 million accelerated share repurchase program (ASR) for Class A common stock[150] - On August 3, 2023, the company secured an additional $65 million in term loans to fund the ASR and for general corporate purposes[150] - Quarterly principal payments on the Credit Agreement loans will increase to $1.19 million starting September 30, 2023[150] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, key performance indicators, liquidity, and capital resources for the reporting period Company Overview and Business Model Xponential Fitness is the largest global franchisor of boutique fitness brands, with over 2,800 studios open worldwide - Xponential Fitness, Inc is the largest global franchisor of boutique fitness brands, with a diversified platform of ten brands[151][152] - As of June 30, 2023, there were 2,520 studios open in North America and 372 internationally[153] - Franchisees are contractually committed to open over 1,900 additional studios in North America, with obligations for another 1,045 international studios[153] - The company's business model is primarily franchising, with company-owned transition studios being temporary holdings for resale[155] Factors Affecting Our Results of Operations Performance is influenced by new studio licensing, opening timelines, same-store sales growth, and overall consumer demand - Growth depends on licensing new qualified franchisees, selling additional licenses to existing franchisees, and opening studios[156] - Revenue growth is significantly affected by the number of studios open and operating[159] - Long-term revenue prospects are driven by increasing same-store sales, which are influenced by total memberships and marketing efforts[159] - International and domestic expansion, including acquisitions and partnerships, is a key growth strategy[159] - Consumer demand, competition, and macroeconomic factors can impact operating results[159] Key Performance Indicators The company tracks system-wide sales, studio openings, AUV, and same-store sales to measure business performance Key Performance Indicators Summary | KPI (in millions, except percentages and counts) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | System-wide sales | $341.3 | $249.8 | $659.0 | $474.3 | | New studio openings globally, gross | 144 | 128 | 261 | 228 | | Studios operating globally (end of period) | 2,892 | 2,354 | 2,892 | 2,354 | | Licenses sold globally (end of period) | 5,872 | 4,935 | 5,872 | 4,935 | | AUV (LTM as of period end, in thousands) | $539 | $456 | $539 | $456 | | Same store sales | 15 % | 25 % | 18 % | 35 % | | Adjusted EBITDA | $25.3 | $17.6 | $48.1 | $32.1 | - A new definition for 'studios no longer operating' was introduced, excluding studios with no sales for nine consecutive months or more[158] System-Wide Sales System-wide sales, representing gross sales from all North American studios, increased by 39% to $659.0 million for the six-month period - System-wide sales represent gross sales by all studios in North America, including franchisee sales not recognized as company revenue[166] - This metric is used to understand royalty revenue (approx 7% of sales) and marketing fund revenue (approx 2% of sales)[166] - System-wide sales for the six months ended June 30, 2023, were $659.0 million, up from $474.3 million in the prior year[162] New Studio Openings Global new studio openings, a key growth driver, increased to 261 for the six months ended June 30, 2023 - New studio openings are a critical component of the company's growth strategy[167] - Global new studio openings for the six months ended June 30, 2023, totaled 261, compared to 228 in the same period of 2022[162] Studios No Longer Operating A studio is classified as no longer operating if it has no sales for nine consecutive months or more - A studio is considered 'no longer operating' if it has no sales for nine consecutive months or more[168] - Such studios can re-enter the operating count if they subsequently generate sales[168] Number of Studios Operating The total number of studios operating globally increased to 2,892 as of June 30, 2023 - The total number of studios operating globally at the end of June 30, 2023, was 2,892, up from 2,354 in 2022[162] - This count includes a limited number of company-owned transition studios[169] Non-Traditional Studio Locations The company operates 34 non-traditional studio locations globally, such as those within other fitness centers or on cruise ships - Non-traditional studio locations are those not operated as standalone facilities[170] - The company currently operates 34 non-traditional studio locations globally[170] Licenses Sold Cumulative global franchise licenses sold reached 5,872, indicating a strong pipeline for future studio openings - Cumulative global franchise licenses sold reached 5,872 as of June 30, 2023, up from 4,935 in the prior year[162] - There are 1,045 studios contractually obligated to open internationally under Master Franchise Agreements[162] - The average time from franchise agreement signing to first studio opening was approximately 10.5 months for recent franchisees[171] Average Unit Volume Last twelve months Average Unit Volume (AUV) for North American studios increased to $539 thousand, indicating improved studio economics - LTM AUV for traditional North American studios was $539 thousand as of June 30, 2023, an increase from $456 thousand in the prior year[162] - AUV growth is primarily driven by changes in same-store sales and new studio openings[172] Same Store Sales Same-store sales for North American studios increased by 18% for the six-month period, showing continued growth from the existing studio base - Same store sales for the six months ended June 30, 2023, increased by 18%, compared to 35% in the prior year[162] - This metric includes traditional North American studios with at least 13 consecutive months of sales[173] Results of Operations (Three Months Ended June 30, 2023 and 2022) Q2 revenue grew 29.9%, but net income decreased due to higher SG&A expenses, an asset write-down, and increased interest expense Revenue Total Q2 revenue increased by 29.9% to $77.3 million, driven by same-store sales growth and new studio openings Q2 Revenue by Type | Revenue Type (in millions) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Franchise revenue | $35.1 | $27.6 | $7.5 | 27.2 % | | Equipment revenue | $14.4 | $12.4 | $2.0 | 16.5 % | | Merchandise revenue | $8.4 | $6.8 | $1.6 | 24.4 % | | Franchise marketing fund revenue | $6.6 | $4.9 | $1.7 | 34.0 % | | Other service revenue | $12.8 | $7.9 | $4.9 | 62.2 % | | Total revenue, net | $77.3 | $59.6 | $17.8 | 29.9 % | - The increase in franchise revenue was driven by a 15% increase in same-store sales and 538 net new studio openings globally[179] - Other service revenue increased significantly due to a $4.6 million rise in revenue from company-owned transition studios[183] Operating Costs and Expenses Total Q2 operating costs rose 74.6% to $40.9 million, primarily due to a $15.1 million increase in SG&A expenses Q2 Operating Costs and Expenses | Type (in millions) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :--------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Costs of product revenue | $14.2 | $13.5 | $0.7 | 5.2 % | | Costs of franchise and service revenue | $3.7 | $4.5 | $(0.8) | (18.3) % | | Selling, general and administrative expenses | $44.4 | $29.3 | $15.1 | 51.6 % | | Depreciation and amortization | $4.3 | $3.6 | $0.7 | 19.8 % | | Marketing fund expense | $5.5 | $4.1 | $1.4 | 33.9 % | | Acquisition and transaction income | $(31.3) | $(31.6) | $0.4 | (1.2) % | | Total operating costs and expenses | $40.9 | $23.4 | $17.5 | 74.6 % | - SG&A expenses increased by $15.1 million, driven by higher salaries, occupancy costs, bad debt expense, and a $3.7 million intangible asset write-down[186] - Costs of franchise and service revenue decreased by $0.8 million due to lower franchise sales commissions[185] Other (Income) Expense, net Total Q2 other expense surged 259.3% to $8.8 million, driven by a $5.8 million increase in interest expense Q2 Other (Income) Expense | Type (in millions) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Interest income | $(0.5) | $(0.4) | $(0.1) | 26.6 % | | Interest expense | $8.6 | $2.9 | $5.8 | 201.0 % | | Other expense | $0.7 | — | $0.7 | NA | | Total other expense, net | $8.8 | $2.4 | $6.3 | 259.3 % | - Interest expense increased by $5.8 million (201.0%) due to higher average debt balances and interest rates[191] - Other expense of $0.7 million was primarily related to Tax Receivable Agreement (TRA) expense[192] Income Taxes Q2 income tax expense decreased by 94.0% to $0.1 million Q2 Income Taxes | Metric (in millions) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Income taxes | $0.1 | $2.2 | $(2.1) | (94.0) % | Results of Operations (Six Months Ended June 30, 2023 and 2022) For the first half, revenue grew 34.7%, but net income declined due to higher SG&A and a substantial increase in interest expense Revenue Total revenue for the six-month period increased 34.7% to $148.0 million, fueled by strong same-store sales and studio growth H1 Revenue by Type | Revenue Type (in millions) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Franchise revenue | $68.1 | $53.1 | $15.0 | 28.2 % | | Equipment revenue | $27.5 | $20.2 | $7.4 | 36.5 % | | Merchandise revenue | $15.6 | $12.8 | $2.7 | 21.3 % | | Franchise marketing fund revenue | $12.8 | $9.4 | $3.5 | 36.9 % | | Other service revenue | $24.0 | $14.4 | $9.6 | 66.4 % | | Total revenue, net | $148.0 | $109.9 | $38.1 | 34.7 % | - Franchise revenue increased due to an 18% rise in same-store sales and 538 net new studio openings globally[198] - Other service revenue increased by $9.6 million, primarily from higher vendor commissions and revenue from company-owned transition studios[202] Operating Costs and Expenses Total operating costs for the six-month period rose 34.1% to $118.8 million, driven by a $16.1 million increase in SG&A H1 Operating Costs and Expenses | Type (in millions) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($) | Change (%) | | :--------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Costs of product revenue | $28.3 | $23.1 | $5.1 | 22.3 % | | Costs of franchise and service revenue | $7.7 | $8.8 | $(1.0) | (11.8) % | | Selling, general and administrative expenses | $79.3 | $63.2 | $16.1 | 25.4 % | | Depreciation and amortization | $8.5 | $7.1 | $1.4 | 20.0 % | | Marketing fund expense | $10.5 | $8.4 | $2.0 | 24.1 % | | Acquisition and transaction income | $(15.5) | $(22.1) | $6.6 | (29.8) % | | Total operating costs and expenses | $118.8 | $88.6 | $30.2 | 34.1 % | - SG&A expenses increased by $16.1 million, primarily due to higher salaries, occupancy costs, bad debt expense, and a $3.7 million intangible asset write-down[205] - Costs of franchise and service revenue decreased by $1.0 million due to lower franchise sales commissions[204] Other (Income) Expense, net Total other expense for the six-month period grew 239.2% to $16.7 million, driven by a $10.9 million increase in interest expense H1 Other (Income) Expense | Type (in millions) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Interest income | $(1.2) | $(0.8) | $(0.4) | 44.4 % | | Interest expense | $16.6 | $5.7 | $10.9 | 189.9 % | | Other expense | $1.3 | — | $1.3 | NA | | Total other expense, net | $16.7 | $4.9 | $11.8 | 239.2 % | - Interest expense increased by $10.9 million (189.9%) due to higher average debt balances and interest rates[210] - Other expense of $1.3 million was primarily related to Tax Receivable Agreement (TRA) expense[211] Income Taxes Income tax expense for the six-month period decreased by 93.3% to $10 thousand H1 Income Taxes | Metric (in millions) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Income taxes | $0.01 | $0.15 | $(0.14) | (93.3) % | Non-GAAP Financial Measures Adjusted EBITDA increased by 50% to $48.1 million for the six-month period, reflecting strong operating performance - Adjusted EBITDA is a non-GAAP measure adjusted for items like equity-based compensation, acquisition income, and litigation expenses[215] - Adjusted EBITDA for the six months ended June 30, 2023, was $48.1 million, a 50% increase from $32.1 million in the prior year[217] Adjusted EBITDA Reconciliation | Metric (in millions) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income | $27.5 | $31.5 | $12.5 | $16.3 | | Interest expense, net | $8.1 | $2.4 | $15.4 | $4.9 | | Income taxes | $0.1 | $2.2 | $0.0 | $0.2 | | Depreciation and amortization | $4.3 | $3.6 | $8.5 | $7.1 | | EBITDA | $40.0 | $39.7 | $36.5 | $28.4 | | Adjustments | $(14.8) | $(22.1) | $11.6 | $3.7 | | Adjusted EBITDA | $25.3 | $17.6 | $48.1 | $32.1 | Liquidity and Capital Resources The company maintains sufficient liquidity with $33.1 million in cash and believes it can meet obligations for the next twelve months - As of June 30, 2023, the company had $33.1 million in cash and cash equivalents, plus $7.1 million in restricted cash[218] - Management anticipates that available cash and operating cash flows will be adequate to meet obligations for at least the next twelve months[219] - The total principal amount outstanding on the Term Loans under the Credit Facility was $265.9 million at June 30, 2023[230] - The company was in compliance with all covenants under the Credit Agreement as of June 30, 2023[224] Credit Facility The company's senior secured term loan facility has been amended multiple times to provide additional funding for corporate purposes - The Credit Agreement includes a senior secured term loan facility with several incremental term loans added since 2021[220][227][228][229] - Borrowings bear interest at LIBOR/Reference Rate plus a margin, resulting in a rate of 11.74% at June 30, 2023[221] - The company repurchased $130.8 million of Convertible Preferred Stock in January 2023, funded by an incremental term loan[229][231] - The company was in compliance with all customary affirmative and negative covenants as of June 30, 2023[224] Cash Flows Operating cash flow increased to $30.6 million, while financing activities used $22.1 million, primarily for preferred stock redemption H1 Cash Flow Summary | Cash Flow Activity (in millions) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $30.6 | $26.2 | | Net cash provided by (used in) investing activities | $(5.6) | $(5.6) | | Net cash provided by (used in) financing activities | $(22.1) | $(12.6) | | Net increase in cash, cash equivalents and restricted cash | $2.8 | $7.9 | Cash Flows from Operating Activities Net cash from operating activities increased by $4.4 million, driven by higher net income after non-cash adjustments - Net cash provided by operating activities increased by $4.4 million to $30.6 million for the six months ended June 30, 2023[234] - The increase was due to $9.0 million from higher net income (after adjustments), partially offset by unfavorable working capital changes[234] Cash Flows from Investing Activities Net cash used in investing activities remained stable at $5.6 million for the six-month period - Net cash used in investing activities was $5.6 million for the six months ended June 30, 2023, consistent with the prior year[235] - Changes included decreased cash used in issuing notes receivable, offset by other investing activities[235] Cash Flows from Financing Activities Net cash used in financing activities increased to $22.1 million due to preferred stock redemption and tax payments on RSUs - Net cash used in financing activities increased by $9.5 million to $22.1 million for the six months ended June 30, 2023[236] - Key uses of cash included $130.8 million for preferred stock redemption and $8.1 million for taxes related to restricted share units[236] - These uses were partially offset by $126.1 million in borrowings from long-term debt[236] Off-Balance Sheet Arrangements Off-balance sheet arrangements consist of franchisee lease guarantees and a standby letter of credit for franchisee loans - The company guarantees lease agreements for certain franchisees, with a maximum total commitment of approximately $3.3 million[237] - A standby letter of credit for franchisee loans has a $0.2 million accrual for potential obligations[238] Critical Accounting Policies and Estimates There have been no significant changes to the company's critical accounting policies and estimates since its 2022 Annual Report - No significant changes to critical accounting policies and estimates were reported since the December 31, 2022, Annual Report on Form 10-K[239] Item 3. Quantitative and Qualitative Disclosures About Market Risk There are no applicable quantitative and qualitative disclosures about market risk for this reporting period - No quantitative and qualitative disclosures about market risk are applicable for this reporting period[241] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control - The company's disclosure controls and procedures were evaluated as effective at the reasonable assurance level as of June 30, 2023[242] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[243] PART II. OTHER INFORMATION Item 1. Legal Proceedings Information regarding legal contingencies is incorporated by reference from Note 16 of the financial statements - Information regarding legal contingencies is incorporated by reference from Note 16 of the Condensed Consolidated Financial Statements[246] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2022 Annual Report - No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022, were reported[247] - Operations could be affected by additional unknown factors or factors currently considered immaterial[247] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds to report[248] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[249] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable[250] Item 5. Other Information There is no other information to report for the period - No other information to report[251] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including policies, waivers, and officer certifications - Exhibits include the Non-Employee Director Compensation Policy, waivers to the credit agreement, and certifications from executive officers[253] - Inline XBRL documents are also included as exhibits[253] SIGNATURES Signatures The report is duly signed by the Chief Financial Officer on behalf of the company - The report was signed by John Meloun, Chief Financial Officer of Xponential Fitness, Inc, on August 7, 2023[257]